PHILADELPHIA – A Pennsylvania federal judge has issued a split summary judgment ruling in a long-standing class action securities fraud lawsuit, pitting a group of investors versus the company behind the Mariner East pipelines and several of its executives.
The Allegheny County Employees’ Retirement System first filed suit against defendants Energy Transfer, LP, its Chairman & CEO Kelcy L. Warren, its CFO Thomas E. Long and John W. McReynolds in the U.S. District Court for the Eastern District of Pennsylvania on Jan. 10, 2020, alleging “violations of federal securities laws arising from Energy Transfer’s allegedly false or misleading statements about, among other things, its role in obtaining permits for the Mariner East pipeline, as well as its compliance with its internal Code of Business Conduct and Ethics.”
(President and CCO Marshall S. McCrea III and COO Matthew S. Ramsey were later added as defendants in the case, while McReynolds was dismissed from the case in April 2021.)
Energy Transfer is a Dallas-based energy transportation and storage company that operates some of the largest oil and gas pipelines in the United States.
“Among its projects is the Mariner East pipeline, a multibillion-dollar, 350-mile pipeline that carries ‘highly volatile natural gas liquids’ from the Marcellus and Utica shales areas in western Pennsylvania, West Virginia and eastern Ohio across Pennsylvania to, among other places, Energy Transfer’s Marcus Hook Industrial Complex on the Delaware River. There the gas liquid is processed, stored, and distributed to domestic and international markets,” McHugh said.
The second phase of the project, named Mariner East II, sought to transport natural-gas liquids across Pennsylvania to a terminal in Marcus Hook, just outside Philadelphia. Though finding approval for that phase was initially problematic, the Pennsylvania Department of Environmental Protection approved the project.
An Associated Press story published in November 2019 regarding an FBI investigation into how the administration of Pennsylvania Gov. Tom Wolf issued permits for the pipeline and whether alleged incidents of bribery were involved sent the share price of Energy Transfer down almost 7% following the story.
“The complaint alleged Energy Transfer and certain senior executives failed to disclose that the permits received to commence work on the Mariner East pipeline project in Pennsylvania were secured through bribes or other improprieties, which would have increased the risk that Energy Transfer or certain of its employees would be subject to government or regulatory action,” McHugh said.
On April 16, 2020, U.S. District Court for the Eastern District of Pennsylvania Judge Gerald Austin McHugh issued an order to refuse the defendants’ motion to transfer the case to a Texas court.
UPDATE
Over four-plus years of subsequent litigation, the case survived dismissal and the plaintiffs obtained class certification. Before McHugh were now the parties’ cross-motions for summary judgment.
“This case arises out of the construction of the Mariner East pipeline in Pennsylvania. Plaintiffs are retirement systems and pension plans bringing this action on behalf of a class of shareholders in Energy Transfer LP, against Energy Transfer, its subsidiary and certain executives. They allege securities fraud in the form of false and misleading public statements affecting the price of Energy Transfer stock,” McHugh said.
“Defendants move for summary judgment as to whether the remaining statements are false, as well as scienter and loss causation. Plaintiffs move for partial summary judgment as to falsity and scienter for some of the statements relating to pipeline capacity.”
McHugh explained that as discovery in the case was completed, there was “the evidence is sufficient to prove loss causation only as to misrepresentations about the pipeline’s capacity and timeline.”
During the earliest planning stages of the Mariner East 2 pipeline, investors were told it would accommodate 275,000 barrels per day of natural gas liquids, with the potential to increase that capacity to 450,000 barrels per day. Such numbers were referred to continuously throughout 2017 and 2018, and the defendants spoke of Mariner East 2’s construction timeline and when they believed it would be up and running.
But on August 2018 earnings call, investors were told that “ME2 would be in-service by the end of the third quarter in 2018 using a 12-inch pipeline, the 12-inch pipeline’s capacity would meet ‘contractual commitments,’ and ME2’s completion date would be in the third quarter of 2019.”
According to the investors, the earnings call disclosed new information.
McHugh concurred.
“I conclude that the evidence of record creates genuine issues of material fact, and that a reasonable juror could determine that the Aug. 9 earnings call and Aug. 10 analyst reports revealed new information,” McHugh said.
“Given the substantial confusion caused by the earnings call, there is an evidentiary basis for a reasonable juror to conclude that it took more than one full trading day (Aug. 10) for the market to absorb the corrective disclosures.”
However, McHugh opted to deny both parties’ motions for summary judgment on supposed material misrepresentations, as to the company’s statements made between November 2017 and January 2018.
“From the evidence presented, I am unable to definitively determine whether, during the November 2017 through January 2018 period, Energy Transfer had a concrete plan to use the 12-inch pipeline,” the order states.
“At the same time, a reasonable juror could conclude that defendants’ aggressive pursuit of that strategy, while still promising to maintain an initial capacity of 275,000 barrels per day, was itself misleading. For these reasons, I will deny both parties’ motions.”
Regarding statements made from February-June 2018, the judge said the investors had shown “sufficient evidence” to illustrate that the defendants made a decision about using a 12-inch pipeline and, therefore, “any subsequent statements that ME2 would have an initial capacity of 275,000 [would be] false and misleading.”
“During this period, defendants were unmistakably moving full steam ahead with their 12-inch pipeline, knowing that this would diminish ME2’s capacity, making their repeated initial capacity statements of 275,000 false and misleading,” he added.
McHugh then granted the investors’ motion for summary judgment on one of their corrective disclosure claims, and their claims that statements made by the defendants between February and June 2018 were misleading.
McHugh also granted the defendants’ motion for summary judgment on the case’s other two alleged corrective disclosures, in October 2018 and November 2019.
U.S. District Court for the Eastern District of Pennsylvania case 2:20-cv-00200
From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com